US-Iran Escalation Sparks Global Market Caution Amid Inflation Fears

World stock markets are set to close out August on a cautious note as tensions between the US and Iran escalate, pushing oil prices higher. The Brent oil futures price rose above $90 per barrel after the US struck Iranian launchers on Larak Island, prompting an Iranian response that included attacks on US forces stationed in Jordan.

The increased risk of further interest rate increases from major central banks has added to concerns about persistent inflation, with Japan's 2-year government bond yield reaching a 31-year high and Germany's 2-year bond yield climbing to its highest level since July 2024. The Federal Reserve Chairman Kevin Warsh's hawkish speech at Jackson Hole on Friday further fueled these concerns.

Analysts now expect the Fed to raise rates by 25 basis points in both September and December, with some predicting a September rate hike as early as next month. The probability of a September Fed rate increase has risen to 57%, sending short-term Treasury yields sharply higher and flattening the yield curve.